Government Revenue Shortfall: Tax Reforms or More Debt?

The Ministry of Finance (MoF), in its inaugural Pre-Budget Statement (PBS) for Budget 2022 (released on Aug 31), noted that the revenue collection for the first half of 2021 (1H21) was lower than expected. The collection for the rest of the year is likely to be even less as many economic activities were halted due to the Movement Control Orders (MCOs).

In order to maintain its spending levels for stimulating domestic economic growth, the federal government would have to either borrow more or expand its tax base. Some tax consultants concur that tax reforms, including the reintroduction of the Goods and Services Tax (GST), are necessary to help replenish the nation’s coffers and reduce dependency on oil revenue. 

PwC Malaysia tax leader Jagdev Singh highlighted that the government must initiate tax system reforms in order to broaden its tax base. “I believe that broadening the tax base is something that the government perhaps needs to consider. Because they cannot continuously increase its debt ratios, debt limit, and they cannot continuously run a (budget) deficit on and on. So the revenue side of things needs to be looked at and there need to be avenues to see how they increase the revenue,” he said. 

The MoF has identified various measures which are being evaluated to increase tax revenue and enhance tax compliance, such as the Special Voluntary Disclosure Program (SVDP) for indirect taxes, the introduction of a Tax Compliance Certificate (TCC) as a pre-condition for tenderers to bid for government contracts, the implementation of a Tax Identification Number (TIN) system and review of tax treatments which have resulted in revenue leakages or harmful practice, as well as the support for the Organisation for Economic Cooperation and Development (OECD)’s Base Erosion and Profit Shifting (BEPS) 2.0 initiative, which is designed to address cross-border tax leakages and aggressive tax planning. But these are not going to address completely the revenue shortfall. Hence the question of raising debt level.

As at the end of June 2021, the federal Government's statutory debt level had risen to 56.8% to gross domestic product (GDP), which is still below the statutory limit of 60%.

In short, we should be ready to expect higher debt to GDP ratios, which include correspondingly a potential downward grading of Malaysia's rating. This should not necessarily be received negatively, as a downgrade can be cushioned by other long-term economic policies introduced by the government towards growth. 

PwC Malaysia deals partner of economics and policy Patrick Tay viewed that although the rise in the statutory debt limit would make the credit agencies “nervous”, a ratings downgrade would not negatively affect that significantly as most government debts are denominated locally. And borrowings must be channelled to “quality spending”.

That’s the problem. Every Government Minister and MP will want some allocation to ensure their “survival” in the next general election. It is the same on the revenue/tax side, no MP wants to see any increase in tax, where constituents are impacted.

Can’t the Government look at excess profit (or some others) for sectors advantaged by Covid-19? Can’t the Government apply prudence and remove wastage in its expenditure? Why can’t we have an Independent Tax and Expenditure Commission to review, reform and restore Government finances?

Reference:

Expected shortfall in govt revenue calls for tax system reforms, raising statutory debt limit, Emir Zainul, TheEdgeMarkets.com